Another -15% housing prediction
Looking for more evidence that housing prices have a long way to come down?
U.S. house prices "likely would have to fall
considerably" to return to a normal relationship with rents, says a
study by one former and two current Federal Reserve economists.The study, which doesn't necessarily reflect the views
of Fed policy makers, suggests prices would have to fall 15% over five
years, assuming rents rose 4% a year. House prices would have to fall
further if the adjustment took place more quickly.The study tracks rents and home prices back to 1960
and found annual rents fluctuated at around 5% to 5.25% of home prices
until 1995. At the end of that year, the average monthly rent was about
$553 (or about $6,600 a year) and the average home price was about
$134,000.But starting in 1996, home prices started to grow much
more rapidly than rents. By the end of 2006, they had more than doubled
to an average of $282,000, while the average rent had risen 48% to
$818. That drove the annual rent/price ratio down to 3.48%.That means the rent/price ratio is about a third below
its long-term average. To return to normal would require some
combination of falling prices and rising rents. The paper suggests
house prices would need to fall about 3% a year, if rents grew in line
with their 4% average annual growth this decade.
This is the second day in a row that 15% number has shown up in an establishment media story about housing. But as we noted here yesterday, a more likely and realistic figure is 30%… or even 43% .
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